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HARTMANN: I want to really dig into modern monetary theory or money theory here. I’ve heard it referred to as both monetary and money theory. Are these two different things or is it two different ways to refer to the same thing?

WRAY: I think it’s two different ways of referring to the same thing with some of us using the word ‘monetary’ and some of us using the word ‘money’. I probably tend to use money more often.

HARTMANN: Sure, if it’s in the title of your book I would definitely do that. For our listeners who are not economists, can you give us a two or three minute snapshot summary of what is modern money theory? What is modern about it? What is different about it in as much as it’s a new theory as opposed to old theories?

WRAY: If I wanted to state it as simply as I possibly could, I would say that those of us who follow this argue that a sovereign government is nothing like a household. So all of these analogies that ‘Oh I couldn’t run my household the way that the Federal Government is running its budget,’ is just not applicable. Sovereign governments are very different from households. Now how did we get this name, modern money or monetary theory? I think that it all goes back to John Maynard Keynes in his Treatise on Money which was his famous book before The General Theory, the one that most people know about, and he just said, ‘Look the kind of monetary system I am describing applies to all monetary systems for the past 4,000 years at least.’ We don’t know what happened before that. Maybe it was the story of Robinson Crusoe and Friday and their bartering fish for coconuts and it was very inconvenient so they decided to use sea shells and gradually over time it evolved into a gold commodity money. Maybe that applies somewhere to some universe, to some distant time, a very distant time, but it does not apply to any monetary economy for the past 4,000 years, this is what Keynes was saying.

HARTMANN: So you’re saying that the story of where money came from is even wrong.

WRAY: That’s right. The story of where money came from is not applicable to any monetary system that is modern in Keynes’ sense in the past 4,000 years. Now, I don’t even need to make that case of course. I think that Keynes was completely right and in my own books I have looked at all the evidence that we have going back to Mesopotamia for example, and I’ll tell you what, authorities played a role all the way back. It sure looks like the monetary system was not invented by Robinson Crusoe and Friday, instead, it was invented by the authorities. In the beginning, the temple authorities, the palace authorities, and then the king and then finally democratic government and all the way back some form of state authority has always been involved in creating, supporting, protecting, managing our monetary system.

HARTMANN: And the reason for this is so they can take a piece of the action. Right?

WRAY: Well, yes.

HARTMANN: Could I give you a thumbnail characterization and you tell me if this makes sense? Whether it was a kingdom or a theocracy or a tribe or whatever it may be, the community as a whole had certain things in common, a commons of some sort, and that commons had to be supported by all the people who were members of that community. So, they had to figure out a way that when people were interacting with each other in ways that could be called economic, that a little bit of that action could be skimmed off the top to pay for that commons. Does that make sense?

WRAY: Yes. My short hand way of stating it is that the monetary system was created and developed and evolved to move resources to the public purpose. It’s pretty hard to say that the crown operated in the public purpose, but clearly, that is what we have evolved to in democratic states. That is why we have a monetary system. The monetary system also serves the private interest too of course. There’s no reason why we have to say it must be one or the other or that they must be in conflict. Of course, there is a great area of overlap in the public purpose and the private purpose and what we need the public purpose to accomplish so that the private purpose can accomplish what it wants to accomplish.

Listen to the rest of what Economist L. Wrandall Ray has to say about modern money theory.

Thom’s Guest: L. Randall Wray Ph.D. is Professor of Economics at the University of Missouri-Kansas City, Research Director with the Center for Full Employment and Price Stability and Senior Research Scholar at The Levy Economics Institute. His research expertise is in: financial instability, macroeconomics, and full employment policy.

Read more about modern money theory at New Economic Perspectives.

SONALI KOLHATKAR IS ON MATERNITY LEAVE.